FMOC - Federal Open Market Committee

FMOC - Federal Open Market Committee

29-JUL-2022


FOMC REVIEW: The Fed's rate decision and statement was in line with expectations, acknowledging some of the downside seen recently; the post-meeting press conference was dovish, with Chair Powell essentially impressing that the Fed was going to be taking a data-dependent, meeting-by-meeting approach, rather than flagging the increment o rate hikes that the Committee would debate. The FOMC lifted rates by 75bps to 2.25-2.50%, as was expected, taking rates back to neutral for the first time since 2019. The only major tweak to the statement was its reassessment of the economy; the Fed now acknowledges that "recent indicators of spending and production have softened" (recall, it previously said that "overall economic activity appears to have picked up after edging down in the first quarter"). This change was to be expected given the softening in many key macro indicators. Going into the rate decision, a very small minority of analysts were suggesting that the Fed could slow the pace of its balance sheet normalization, but the central bank opted against doing so. The statement offered no clues about what the Fed would do at its September meeting, but at his post meeting press conference, Chair Powell was more explicit, stating that over the coming months, the Fed was looking for compelling evidence that inflation was falling, and the pace of future rate hikes would depend on incoming data and the outlook for the economy. This suggests that the Committee will be data-dependent, and act on a meetingby-meeting basis, rather than flagging policy in advance. Powell did, however, state that another large rate hike could be appropriate at the next meeting, and argued that the Committee wanted to get rates into moderately restrictive territory, which he said was between 3.0-3.5%. According to the June SEP, rates will be at that level by the end of this year (these forecasts will be updated in eight weeks' time, but Powell referred journalists to the June SEP when asked about his economic views); money market pricing, which had expected rates at 3.4% by end-2022 before Powell spoke, eased to around 3.25% as the Fed Chair was speaking. Money markets are however pricing a degree of rate cuts next year; Powell was asked if his view of the terminal rate has changed (the June SEP implies this sits at 3.75-4.00%), and he responded that it had evolved for all participants on the Committee, and that the Fed would have more data by September. Naturally, Chair Powell was quizzed on whether the US economy was in a recession; Powell seemed reticent to use the phrase, but reiterated that it was necessary to slow growth in order to create some slack in the economy, to allow the supply-side to catch-up; Powell also said that the slowdown in Q2 was notable, but the economy was still on track to grow this year, and demand was strong.